The annual uprating might be in line with inflation (based on the Retail Prices Index or the generally lower Consumer Prices Index) or it might be in line with earnings growth.

That is Lord Hutton's suggested approach.

"As earnings are normally expected to increase faster than prices, particularly the CPI measure of price inflation, this is a good result for the public sector," said Michaela Berry, of pension lawyers Sackers.

John Ball of actuaries Towers Watson said: "For people who don't get pay rises on promotion, career average benefits that are uprated with average earnings growth will be no less valuable than a final salary scheme."

The annual uprating might even be set above inflation.

For instance, GPs and NHS dentists have their earnings, for the whole of their career to date, uprated by RPI plus 1.5% each year while they are still contributing.

When they retire, their annual pension is set at 1.87% of the final uprated lifetime sum.

As you can see, calculating a pension in a career average scheme can be very complicated and involves a number of key variables.

Another important factor at the discretion of those designing the scheme, in this case the government, will be the extent of inflation-proofing once a pension is in payment.

The greater the protection, the more expensive the scheme will be, and the higher the contributions that will be required.

From April 2011, inflation-proofing across all public sector schemes is going to have the current link to RPI replaced by the slower growing CPI.

Undefined

Other elements contributing to the cost of a career average scheme will be the extent of other features, such as a pension or other benefits for dependents, spouses and partners, both before retirement and after.

"[We are] concerned at the degree to which the proposals require further detailed announcements by government and negotiation, scheme by scheme," said the Association of Chartered Actuaries (ACA).

So, career average schemes are very different to final-salary schemes, despite the continued practice of the pensions industry in describing both of them as "defined benefit" schemes.

It would be much better to describe career average schemes as undefined benefit schemes.

That is because it is very hard indeed for anyone to calculate in advance how much pension will be generated for them on retirement.

By contrast, in final-salary schemes, the eventual pension is a straightforward factor of how many years you have been paying in, and your salary in your final year of employment.

Winner and losers

The most important fact to grasp though is that unless a new career average scheme has a more generous accrual rate than the final-salary one it replaces, then almost no-one will be able to accrue a higher pension then before.

Many members will, for the same number of years and the same level of annual contributions, receive a much lower pension.

That is because of the obvious reason that most people experience their peak earnings in their last few years of work after starting off with relatively low earnings while young.

In a career average scheme low wages or salaries in the early years directly affect the pension calculation; in a final salary scheme they do not.

"The changes are likely to have an even greater impact on higher paid employees and those who receive above-average salary increases in future," said John Prior of Punter Southall.

Retire later

Although the government is planning to introduce an average increase of three percentage points for public sector employee pension contributions, this is aimed at cutting the government's contributions, not at raising the level of benefits.

Perhaps even more important than the new basis of calculating the pensions will be the proposed higher retirement age.

Some existing staff who retire at 60 under their current rules will be told they must now work to 65 for a full pension.

And that normal pension age, it is now proposed, should rise even further, to 66, 67 and eventually 68, in tandem with the government's existing plans for the state pension.

The effect of this will be just as profound as changing the underlying method for calculating someone's pension.